Here's a chart sent to us by colleague Justice Litle:
Interesting huh? Consumer credit has fallen off a cliff.
What does that mean exactly? It means Americans aren't borrowing...and they aren't buying either.
This weekend, The New York Times noticed:
"Americans stop buying; trade deficit declines" begins the headline.
This is the story we've been telling here at The Daily Reckoning for two years. Americans have to cut back. They are out of time and out of money. Ten years closer to retirement than they were in before the tech stock crash, Baby Boomers are not a penny richer. Now, they're facing a funky economy where housing prices are in decline, jobs are hard to find and lenders are reticent to lend them more money. Daddy has finally taken the T-bird away.
But wait...if the Baby Boomers stop spending won't it have, like, repercussions?
The NYT continues:
"For the first eight months of the year, the United States trade deficit with China is down by about 14 percent or $20 billion, compared with one year ago. The nation's trade deficit with Japan has shrunk by almost 20 percent, and its deficits with Mexico, Canada and the European Union are down more than 40 percent.
"The huge shift stems mainly from the staggering collapse in trade. With credit markets frozen and Americans facing the highest unemployment in more than 30 years, the United States suddenly stopped shopping overseas at anywhere near the volumes that had become normal."
Americans were the world's champion consumers. Just lend them money; they'd spend it. But when they stop spending it brings a hush to the entire planet. The malls go quiet...trucks slow down...ships are idled...and finally factories are shut down. Clerks, drivers, stevedores and assembly line workers all go home. That is what a depression is all about.
The feds are trying to get consumers to spend again. They've given them tax rebates, incentives, loans, and bribes. They've run a federal deficit three times higher than the previous record. They promise $1 trillion deficits "as far as the eye can see." And they put at risk a sum of money equal almost to the entire US GDP.
Still those hardheaded consumers won't consume like they're supposed to.
Suddenly, it's the 'Age of Thrift.'
But if it's really the age of thrift, the stock market doesn't seem to have gotten the message. The Dow rose 78 points on Friday, to a new post-crash high. Oil held at over $72. And gold lost $7 to close at $1,049.
What are stock market investors thinking? Are they thinking at all?
If the consumer credit party is over...and the Baby Boomers are on the wagon...is it really possible for US businesses to grow...and prosper?
Yes, it is. America has great businesses with great brands. As the dollar falls it should be able for them to gain global market share in some sectors. But 70% of the economy is consumer spending. Until that changes, the US economy is hostage to US consumer spending. When consumers stop consuming, the US economy's wheels stop turning.
Okay, so you're thinking: "Well...maybe Americans have to cut back, but there are plenty of other people in the world. Let them do the buying for a while!"
And you are right. America has less than 5% of the world's population. But it consumes more than 20% of the total world's output - as measured by GDP. Clearly, Americans have been doing more than their fair share. It's time to let the foreigners belly up to the bar. Heck, they're skinny. They could use a good drink.
In time, foreigners will spend more. We don't doubt it. But rebalancing the world's economies won't happen overnight. Nor even in a couple years. It will take a long, long time. And a lot of investment in new tools, new training, and new techniques. Until that happens, when US consumers stop buying it slows wheels all over the world.
Every time finance ministers and heads of state get together they talk about "rebalancing" the world economy. They promise to take steps to make it happen. But so far, the market is doing all the rebalancing work on its own.
And instead of letting nature take her course...allowing the invisible hand of capitalism to direct capital to where it is actually needed...the heavy hand of government blocks the process of correction.
Credit is still contracting. And Reuters reports that "small US firms face credit squeeze."
In theory, a genuine recovery in the United States could be led by exports. A cheaper dollar...and a cheaper workforce (in global terms)...would make the United States a better competitor.
But even a cheaper dollar is not guaranteed. Consumers may have stopped borrowing, but the US government borrows more than ever. This borrowing - in dollars - increases demand for greenbacks and may actually sustain the dollar at a higher level than it should be. The feds' appetite for borrowing could also force up interest rates - further restricting small businesses' access to easy credit.
There is a big difference between selling a few more Harley Davidsons overseas and real export-led economic growth for the US economy. The latter would require hundreds...thousands...of Harley Davidson enterprises, selling billions worth of goods and services to foreigners. And right now, those enterprises don't exist. They have no lobbyists trying to get TARP funds. They have no pet Congressmen slipping tax breaks for them into defense bills. They have no unions backing them. How could they; they haven't even gotten off the ground yet. And they may never get off the ground if they can't get financing.
The boomers are saving. They put their money into the safest possible place - US bonds! That is, they lend it to the government. They're the feds' biggest single source of financing - even bigger than the Chinese.
Meanwhile, the feds pump billions into the banking system. They supply the banks with capital for expansion and consumption. But instead of making loans to the private sector, the banks take the feds' money and lend it right back to them. They can borrow at a negligible rate...and then use the money to buy long-dated T-bonds yielding over 4%. Result: banks make money; the private sector has no money to create new businesses.
This weekend, we had a conversation with an English carpenter.
"It's rough. I remember just a couple of years ago, I could get work anywhere. Now it's off and on. I still find work, but I have a lot of free time too.
"It's not easy. Not with four children. We don't have any choice. We don't get any public benefits, you know...because I'm working. But I'm not working as much as I used to. And I'm not getting paid as much. So what can we do? We have to tighten our belts. We get by. But we're definitely not spending money they way we used to. In fact, I wish we hadn't spent so much back then. I'd like to have some of that money now."
A report in the Telegraph predicts British property prices - which have been in an upward trend for several months - are headed down again...with a 17% decline expected.
Until tomorrow,
Bill Bonner
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
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- Baby Boomers Face Early Retirement With No Money Saved
- The Country is Going into a Recession with its Finances in the Worst Shape Ever
About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Earl Mardle on 16 October 2009:
Some points Bill.
The REASON the share market is booming is because the vast amount of credit being created is stuck in the favoured institutions. They either can't lend because they need to soak up all that credit to balance their own wrecked books, or they wont lend because there are no customers for debt.
In fact, as more people "save" to pay down their existing debt, that problem will get worse.
As for the foreigners spending. To do that they need to be able to keep some of the money. You forgot to mention that not only have the goods and services been flowing to the US, so has the money. At first that was profits from foreign investments, carefully structured not to have to pay local taxes and set up in the first place to arbitrage wage differentials. Short form, exploit poor people and keep them poor. In which case, expecting them to start buying begs the question, 'with what?"
But then the money flow shifted to debt. The US didn't become the world's biggest debtor by prayer alone, it involved vast flows of money from the rest of the world into the soak-hole of the American consumption machine. Until that money either comes back out (fat chance) or the US starts to leave a lot more of it with those people who create the value in the first place, there will be no foreign led consumption boom.
In fact a few years ago George Soros was saying that with both goods and money flowing so rapidly into the centre of the US economy, the outcome would be a disaster. He was right, and for the right reasons. But then Soros has no cred with Wall St either.
Then there is the longer term issue of resources. Lets just suppose that the planet's ability to produce vast quantities of cheap, easily accessible high EROEI raw materials might have peaked.
That would suggest that we face a future where rather less stuff will be produced at lower profits. Without lots of business going on to spread the wealth around, again, who will do the buying and with what?
Oh, and don't expect the so-called developed world to step up. What is true in America is also true to varying degrees throughout Europe and the rest of the anglo world like Canada, Australia and NZ.
The "credit-worthy" are now all tapped out.
Which is another reason that we can make the case for a deflation. All the pump-priming in the world means nothing if the pump is broken or their is no water in the well. There is no pathway for that new credit to flow into the real economy and no demand for it to do so.
So it gets jammed in the bottle neck of the share markets where, with the flick of a switch all that inauthentic value can be extinguished.
One more thing. I read a while back that something like 70% of all the trades on NYSE were from "liquidity" traders like GS and their like; people who hold shares for milliseconds sometimes before passing them on at a profit. Take all that microtrading out of the market and you are left with a very small number of actual investors buying shares (at prices artificially inflated by the microtraders) because they have an interest in the company.
Its a suckers' rally alright, and it WILL go bang on us. Wouldn't it be nice to know exactly when.